Whether or not to share your financial circumstances with franchisees is a common question among many franchisors. However, as a legally compliant franchisor, it’s essential to share your financial status when franchising a business in Australia.
Your financial status will be one of the primary determinants for the franchisees seeking to invest in the business. Knowing whether the idea is financially sound will help them assess the associated risks and costs.
That’s why the Franchising Code of Conduct also requires franchisors to inform prospective franchisees about their financial circumstances.
In today’s blog, you will learn when to provide your franchisees with financial information and what financial documents you should have.
So, if you plan to franchise a business in Australia, continue reading!
When To Provide Information Regarding Your Financial Circumstances?
The franchise law in Australia highlights several situations where you should provide information about your financial circumstances to the franchisee.
The circumstances include the following.
• Before your potential franchisee signs the franchise agreement,
• Before an existing franchisee extends or renews their franchise agreement,
• If your franchise requests an updated copy of the disclosure document,
What Financial Documents Do You Need To Provide To The Franchisees?
When franchising a business in Australia, you must provide these documents to prospective franchisees to highlight your financial status.
- Disclosure Document
If you have ever looked into how to franchise a business in Australia, you have most likely stumbled upon the requirement of establishing a disclosure document.
The disclosure document should contain your financial details, along with
• A financial report on your last two years’ financial status,
• A solvency statement reflecting the franchisor’s position,
• A report from an independent auditor reflecting your position.
To align with the Code, you shall update this document within 4 months of the end of the financial year. You can avoid the update if you
• Didn’t sign new agreements in the year,
• Don’t have any intention to enter into a new deal in the following year or only entered into one contract,
Yet, if your franchisee asks for an update when franchising a business, you must update the documents and ensure they reflect your financial situation.
- Solvency Statement
A solvency statement serves as an indicator of your company’s ability to meet its financial obligations and clear debts. Giving your franchisee a solvency statement when franchising a business means confirming that you are in a financially sound position.
The franchise law in Australia requires you to provide a solvency statement by the end of the financial year or at the date of the statement. Furthermore, the document should have a signature from at least one director of your franchise network.
- Financial Reports
Sometimes, the Disclosure Document may require organisations to provide financial reports for the last two years. The franchise law in Australia requests franchisors to follow the Corporations Act 2001 when preparing this report.
Based on the operations of your organisation, you might need to add other crucial financial documents to the financial report.
- Auditor’s Report And Statutory Declaration
An independent audit report will solidify your company’s financial abilities by analysing its solvency. Specifically, it’s essential to report the statutory, assuring the company is solvent.
- Materially Relevant Facts
As the franchisor, you are responsible for notifying your franchisees about “materially relevant facts”. You should complete this within a reasonable period when franchising a business. Typically, it should not exceed 14 days. Also, you may include this information in the disclosure document.
Materially relevant facts are usually related to:
• Businesses going into administration,
• Business going into liquidation,
• Executing a deed of company arrangement,
• Court proceedings and Court judgements,
• Non-payment of Court judgements.
Final Thoughts
When franchising a business in Australia, it’s essential to notify your franchisees of your financial status. It will help them determine whether they should invest in your business or not. The franchise law of the nation also requires you to be open about your financial circumstances. So, if you are franchising a business, ensure you are ready to discuss at least two years of financial records and submit the above documents.